tv Bloomberg Real Yield Bloomberg January 26, 2018 12:30pm-1:00pm EST
♪ abramowicz denver jonathan ferro. 30 minutes committed to fixed income. this is "bloomberg real yield." ♪ lisa: coming up, rate dele alli -- ray dalio. investors are earning the least extra yields on u.s. corporate bonds since 2007. are there any gains left? janet yellen's last meeting. we talk about her legacy.
we start with the big issue, dalio's warning resonating from davos to new york. >> a 1% rise in bond yields will produce the largest bear market we have seen since the 1980-1981 period. >> are we in it? >> there will be a time of the bank of japan and ecb begin tightening. that will be the time when bond yields increase. i don't see that now, unless i'm wrong on inflation. i don't believe the federal reserve will tighten before suggested. >> i don't think the bear market is starting. since 1990 we had many, many predictions but it has not happened. lisa: joining me in new york is subadra rajappa, and rachel , and coming to us from
london is luke hickmore. i want to start with you, subadra. forthe selloff just begun, is this the extent of it and will people pile back in? subadra: that's a good question. i think there is still more room for bonds the selloff from here. they seem to be pricing higher over the last -- in the last few months. i think we could probably go a little higher. it depends on where the funds rate is. 3%.s still around 2% to i don't see a big upside from here. lisa: what is the threshold where people will pile back into treasury yields? they are at the highest level
since 2014. we are seeing high levels here. subadra: you can see drips and drabs of demand. the differentials is quite large. i think we can see demand again because the back end of the curve looks relatively cheap. i think you will see demand as we price higher. lisa: is there a tipping point? subadra: for how high they could go? we have yields ending the year close to 2.7% or 2.8%. we don't see that much room for deals to sell off from here. lisa: luke, you are overseas. are you buying treasury yields? luke: no, i would not buy treasuries yet. if we get into a three or slightly higher context, that will be the attractive level to buy. we could drift up as the year goes along and people realize
three rate rises, maybe we get four or five. the dollar continues to struggle. that rises inflationary concerns. there is a lot of debt around. i think that will suppress future returns. all types of asset classes and growth. probably limit where the yields can go. which is why i would agree with ray dalio. there will be short-term pain. this will be a correction to more of a fair value level. lisa: rachel, what is the base case scenario for 10-year treasuries given the fact it is essential for credit investments? rachel: the shape of the yield curve is interesting. it continues to move up. it is likely to reach 3% in the next 12 to 18 months. we expect three more hikes this year and probably two or three next year. maybe a little bit more
aggressive than most on the number of hikes we expect, but the lack of the point, on -- to echo the point, higher equity market and higher rates. you are seeing better funded status. that will motivate independent into debt which will support the long end of the curve. lisa: the growing consensus is growth is picking up globally. synchronized global growth is the catch phrase of the moment. why are we not seeing more of a rally? why are we not seeing more of yields rising? bonds should be crossed right now. every news item has been terrible for them and the yield curve continues to flatten. why? subadra: we are still between 2% and 2.5%. we might every priced in the second half of 2017, but for the most part growth is still subdued globally. it is better than what it was before, but we are not seeing 4%
growth or really large numbers. i think inflation is extraordinarily contained globally. the third factor keeping bond yields relatively low is the fact there is a huge stock effect of central bank holdings of bonds. that will be something that will prevent yields from rising meaningfully. lisa: i remember when people used to care about debt. when people used to worry this would be a problem. no one seems to care anymore, even though the amount of debt in the world is at $9.6 trillion. it has gone down a little. are you worried about this? are you buying negative yielding debt? luke: i am not. european debt is really expensive. it faces a lot more problems and probably closer to a bear market in u.s. treasuries. you will see -- you are starting
to see capacity across and within europe. even italy is starting to see a lot of big improvements in the employment market. in thehe german bund 50's or 60's is the wrong level. that should be 90 or 100. that will take a lot more attention than a trickle upwards in the u.s. 10-year to the 3% level. lisa: there could be a potential violent unwind? luke: yes, very much so. mario draghi was telling you yesterday we will stop buying this stuff in september. if the bank of japan stops or starts to stop their program as well, that is a risk factor for the european bonds, not u.s. bonds. lisa: rachel, how much do you look at the yield curve when making credit decisions? how much do you say, this indicates a falling down. that should be bad for
high-yield credit. rachel: absolutely. the investment great market is more correlated with treasuries. they react over short periods of time. they will inversely correlate. we saw that very much happening over the big rate rise over the last four or five months when we saw an immediate treasuries, five-year treasuries. you saw them move up by 60 basis points. high yield spreads came down by almost 60 basis points. still a positive total return. the pacing of any selloff is very important. a steady leaking, wider rate can absorb positive total return. i think spreads are pricing in a very benign outlook. we expect to pick up in inflation and volatility this year. they are likely to exert pressure on credit spreads, but more towards the back half of the year. lisa: walk us through the
contagion effect. we have some kind of mass selloff in negative yielding debt. how quickly could that translate the higher yields in the u.s.? subadra: i agree with luke on the fact i expect bund yields to rise more. germany, yields are a lot lower than the u.s.. the selloff will be mostly led by what happens overseas. whether that will be a contagion, i don't believe in that scenario. i think central bankers across the bloomberg are stored nearly cautious. they are watching every metric. even in the u.s. we've had one hyper quarter. that is very growth -- we have had one hike per quarter. they will be extraordinarily careful and cautious. lisa: thank you so much. we will be discussing more. and rachelra rajappa golder and luke hickmore.
♪ lisa: i am lisa abramowicz. this is "bloomberg real yield." i want to head to the auction block. we start with a junk bond offering. $2.5 billion is so of bonds to refinance debt. they sold the notes in two parts following collapse of talks with sprint in november. in europe, spain drew record orders for his biggest syndicate offering since 2014.
borders for the tonight in your notes total $52 billion compared with more than $12 billion on the offer. emerging-market bond sales at a record pace. a scramble to lock in low yields. argentina to china has raised $65 billion. still with me is subadra rajappa , rachel golder, and luke hickmore from aberdeen standard investment. you can hear that my voice is totally going away. back and thank you for helping me out. thebig question to me is biggest consensus trade of the moment is emerging-market. everybody is piling in. my question is, where is the opportunity left? i want to start with you. do you see opportunity, and if
so where do you see it? luke: i have been sitting in the emerging markets seen this year. they are struggling to find the easy opportunities for sure. even in frontier markets on the edge of those emerging markets and the things investors are interested in, that part of the area they have been reducing allocation recently. they are looking to venezuela, argentina. they are having a look at mexico and the elections, but not getting too involved in these assets until they actually get to attractive levels. emerging-markets area,s in the 220 to 230 but a lot of that is venezuela. it is attractive compared to investment-grade. if you look at it, you need to be more and more cautious and a lot more selective about what you do actually by. -- actually buy.
brazil, safer countries benefiting from the oil price coming up like russia. these are better places to be invested in emerging-market debt recently. lisa: rachel? rachel: we do still like emerging markets but recognize they have gotten relatively rich. local currency is still a preferred area. we feel the strength of emerging market economies is very compelling. valuations have extended within the fixed income opportunity set. we like short u.s. rates. we like securitized credit. and in student loans. there are opportunities for attractive yields. we are relatively neutral based on evaluations. those are some of the preferred traits. lisa: do you agree with what you are cheering? subadra: yes. the macro environment is extraordinarily accommodative. you have strong global growth.
you are continuing to see a strong rally in risky assets. you have seen some decent credit upgrades in countries like spain and portugal. -- a veryery good good demand for bonds globally. any new issue that is the market seems to be well received. i want to move from emerging markets the u.s. investment-grade credit. i want to direct this to you. we have seen another inflow and the u.s. investment great bond funds last week. the spreads on investment-grade credit in the u.s. have narrowed to the least since 2007. you can see that with that chart right there. does this concern you given the fact we are in a rising rate environment and we count on those spreads to absorb any rise? luke: it has been a remarkable start to the year. spreads have gapped. we were hoping for spreads on a
more gradual pace. be sellinghance to these rallies rather than buying. that is possibly the attitude we will be having as the year goes on if we remain at these tight levels. we will just be selling more credit. it is fine, fair value, not particularly expensive. economies are doing well. you are supported by axp markets. a yearw it is a year or and a half and we will be running into problems with the economy and possibly with credit markets as well. it is a time to be recognizing this is probably the best you get from credit rather than actually there is more to go to. lisa: you focus on high-yield credit market. spreads are similarly tight there. where are you seeing opportunities? rachel: we are not at the extremes of high-yield spreads yet. we widened out materially in november.
they still compensate very adequately for the risk of default going forward which is very low. we see the faults less -- defaults less than 2% in 2018. rising rates don't have a lot of room to be absorbed in the spreads that exist. there is some risk of widening spreads in high-yield. volatility is the greatest driver of that. we think animal spirits will create or activity amongst corporate leadership. we think m&a is likely to pick up. we have seen acceleration over the last couple of months. that will bring new supply to the market. it will benefit the valuation picture. it should help the equity markets as well. investment-grade companies tend to be the buyers and see themselves leveraging more. high-yield companies are often the targets of that. they can benefit from it. another thing i want to mention was leveraged loans. they are a floating rate asset class.
they have relatively attractive yields. higher-quality. they are a relative safe haven. lisa: thanks so much. we will ask you to hang around. and hickmore, rachel golder subadra rajappa onset with us. we will be back with more to discuss. still ahead, the final spread. the fed's decision, a state of the union address and the u.s. jobs report. this is "bloomberg real yield." ♪
we have another round of earnings with a heavy run of technology names reporting. and we get the u.s. jobs report. still with me is subadra rajappa , rachel golder and luke hickmore. thank you all for being here. we are talking about the fed now. lisa: we are talking about the week ahead and what we are most focused on right now. rachel, i want to start with you. is the job support the most important thing? is at the trump speech? report, we jobs don't think it will be that material this coming week. we expect a fairly consensus-high number that will continue to move the unemployment rate down. we think the market is expecting a good jobs number. the gdp number was a bit of a disappointment. missll it a high quality in that consumer spending and
corporate spending were good. it was inventories and trade that negatively impacted it. the good numbers are good supports for the economy going forward. subadra: i think we could get a lot of interesting soundbites next week given the state of the union. we can get -- for me as a rate strategist, the treasury announcement will be interesting. we can get some initial hints on how the treasury will be changing its financing over the upcoming months. the fomc meeting will be quite interesting given it is janet yellen's last meeting of her career. i think -- all of these have potential to the market moving. i agree with rachel. for the employment number, the focus will be on earnings because that is really where i think we need to see some gains. julie: in terms of the fomc
meeting and janet yellen's final appearance, fully get anymore from jay powell? he will presumably defer to her. to be get anymore flavor from what we are in store for for him? luke: i think he is probably going to rely on his confirmation hearings to give people a sense of where he wants to go. it feels like it will be a continuation of janet yellen's approach. as jay powell comes in, this is all about janet yellen leaving. she will give some feelings about the economy and go up into a different realm. i personally never particularly am interested in the rules. it will be very volatile. lisa: what is the biggest economic indicator? it affects more broadly the u.s. credit and frankly emerging
markets. the dollar has been the story of the day, of the week. what could make it go stronger and disrupt a lot of the consensus trades right now? indicator, igle would she consider financial indications indicator. it combines a bunch of things. the signals we have gone to as loose financial conditions as we have seen since 2014. we think this means party on for the near part of the year. in the back half watching volatility, which has begun to move off the floor. if it does more so, it will be compressed or scattered. lisa: it is time for the final rapid fire. we ask questions to each of you. you have to answer really short answers. the first one is what is more likely to selloff in the next nine months, u.s. high-yield or investment-grade bonds? luke: investment great bonds.
rachel: u.s. high-yield. subadra: u.s. high-yield. lisa: what is the better bet over the next three months, buying government bonds in greece were germany? luke: i did not just the beginning of that. lisa: greece or germany 10-year bonds? luke: greece. rachel: the horizon is critical, greece. subadra: greece. surgeuninfected with big in inflation or unexpected big drop off in growth? luke: inflation. rachel: inflation. subadra: inflation. julie: everybody agrees. subadra rajappa, luke hickmore, rachel golder thank you so much. ♪
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david: open for business. president trump addresses world leaders in davos and try to persuade them there has never been a better time for hiring, building and investing in the united states. pathway to citizenship. on his return, president trump is inspected to propose a new deal on immigration and the border wall. with 1.8 million new citizens and $25 billion at stake. the view from south of the border. we talk about the border wall and difficult nafta negotiations hanging in the balance. we talk with former mexican president vincent a foxx about a critical turning point in u.s.-mexican relations. . president vincente fox ♪ shery: mixed messages. after running a campaign of proposals and fiery rhetoric around immigration, the president is softening his tone.